InvestmentEurope's recent Lausanne Summit saw ten management groups outline their unique investment ideas, including Schroders.
InvestmentEurope’s recent Lausanne Summit saw ten management groups outline their unique investment ideas, including Schroders.
In a climate where both cash allocations and government bonds are risky, Schroders highlights dividends as one of the remaining areas that can grow wealth. In 2011 dividends grew by about 18% in Europe, the US, and UK, and 11.7% in Asia.
Presenting Schroders’ equity income products, income fund manager Ian Kelly explained: “Cash is a risk in the current environment and government bonds are not an option. However dividends are growing despite the crisis and high yield stocks are outperforming.”
Cash investors must fight corrosive inflation. Kelly pointed to the 45% erosion in real terms of cash given 6% inflation.
Central banks are choosing inflation over default. Income investors choosing long-term core debt face yields now at 30-year lows, all well below 2%, and at risk from inflation.
By mid-September Swiss two-year debt, German two- and 10-year, US and UK 10-year paper all failed to match Schroders’ 2012 global CPI target. As investors rotated to higher yielding credit, yields there also fell sharply, he noted. The ‘yield gap’ between sub-investment grade bonds and dividends from stocks has contracted from 16% in 2008, to 2.5% now. The gap has only been narrower once since 1990.
The hunt for dividends is not at the expense of credit quality. The Schroder ISF Global Equity Yield Fund typically holds companies of higher credit quality than the iShares IBOXX Global High Yield.
But what of investors who argue earnings are changeable, whereas fixed bond coupons are not, absent default? Kelly explained that, in the previous market crises, dividends were cut by 10% or less, even when earnings in each case declined by 30% or more.
“Managers have huge levers they can pull to keep dividends, they can cut M&A, cut expansionary capital expenditure, for example, but at the moment balance sheets are looking cash-rich, so we are comfortable with dividends,” he said.
Schroders’ equity income funds include global and European variants, and a ‘European Dividend Maximiser’ that also writes then sells cash-settled call options, to harvest cash earned upfront, if these options subsequently expire worthless to their buyer. The team typically writes options each quarter, exercisable about 10% higher than the prevailing price.
Its trio of equity income funds made 11.4% (global) 13.8% (European) and 14.3% (Maximiser), this year to August.
For full details on InvestmentEurope‘s Fund Selector Summit click here: